In Teufel v. Northern Trust Co., Nos. 17-1676 & 17-1677 (7th Cir. 2018), the following happened. In 2012, Northern Trust changed its pension plan. Until then it had a defined-benefit plan under which retirement income depended on years worked, times an average of each employee’s five highest-earning consecutive years, times a constant. Example: 30 years worked, times an average high-five salary of $50,000, times 0.018, produces a pension of $27,000. The parties call this the Traditional formula. As amended, however, the plan multiplies the years worked and the high average compensation not by a constant but by a formula that depends on the number of years worked after 2012. The parties call this arrangement the new PEP formula, and they agree that it reduces the pension-accrual rate.
Recognizing that shifting everyone to the new PEP formula would defeat the expectations of workers who had relied on the Traditional formula, Northern Trust provided people hired before 2002 a transitional benefit, treating them as if they were still under the Traditional formula except that it would deem their salaries as increasing at 1.5% per year, without regard to the actual rate of change in their compensation. James Teufel contends in this suit that the 2012 amendment, even with the transitional benefit, violates the anti-cutback rule in ERISA. He also contends that the change harms older workers relative to younger ones, violating the ADEA. The district court dismissed the suit on the pleadings, and Teufel appeals.
Upon analyzing this case, the Seventh Circuit Court of Appeals (the “Court”) determined that the amendment did not violate the ERISA anti-cutback rule. This obtains because the benefit payments under the amended pension plan are higher than if the plan had terminated, with the benefits transferred to a new plan, and then continued to accrue under the new PEP formula. Under the amended pension plan, Teufel gets the vested benefit as of March 2012 plus an increase in the (imputed) average compensation of 1.5% a year (for pre-2012 work) for as long as he continues working. Changing a plan to base benefit accruals on an assumed salary increase, rather than actual salary increase, does not violate the anti-cutback rule.
Further, the Court determined that the amendment does not violate the ADEA. The pension plan complies with section 623(i) of the ADEA, since benefits depend on the number of years of credited service and the employee’s salary, not on age. Because salary generally rises with age, and an extra year of credited service goes with an extra year of age, the plan’s criteria are correlated with age—but prior cases establish that these pension criteria differ from age discrimination. Since it complies with section 623(i) of the ADEA, the pension plan does not violate the ADEA.
As such, the Court affirmed the district court’s ruling.